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Real estate, banks and black market among obstacles facing cannabis business owners

Real estate, banks and black market among obstacles facing cannabis business owners

From the Lee President's Award - Green Rush in the 805?: Cannabis on the Central Coast - Looking at land use, money, science, law enforcement and education series

David Ross had been running a medical marijuana grow as part of a nonprofit collective for about a year when he received a phone call this month that rocked his operation to its core.

Ross was at home when he was called and told that police had entered his operation, named Todem, in Amador County for a compliance check after receiving calls about it being a public nuisance. Ross arrived at the business and was detained for four hours while officers secured a warrant to search the premises. Once that warrant was served, he watched as task force officers rounded up all of his company’s unprocessed plants, about 15 pounds of processed plants, and $15,000 in cash before arresting both Ross and his business partner on misdemeanor charges of cultivation and a felony charge of conspiracy for sales.

“They took no regard of our articles of incorporation as a mutual beneficial nonprofit cooperative, no regard to seller’s permit, no regard to business license and receipts from dispensaries we’ve done business with throughout the year,” Ross said this month, following his two-day stint in jail. “They dumped all the one-eighth ounce jars, which seemed to me like they didn’t want to submit the jars as they were as evidence. They seized everything on the property and they cut down two small medical gardens that were in greenhouses.”

The incident illustrates a primary fear for many current operators in the marijuana industry, particularly those who conduct business in a gray area that is technically legal in some respects, but could be considered illegal in others. As California moves toward a complete overhaul of the soon-to-be fully legal medical and recreational marijuana industries, Ross and many others who do business in the field are hopeful that such scenarios are a thing of the past.

Still, they will have plenty of new rules and regulations to deal with.

The process to jump-start a cannabis-based business figures to be fraught with many challenges, according to many in and around the industry. However, the fight is worth it, according to many current and would-be business owners, as the industry steps out of the shadows and becomes fully legitimate.

Location, location, location

Lompoc resident Mark Ashamalla has his sights set on opening a business that will run “the whole gamut of the cannabis industry” — everything from growing, extraction, distribution and a storefront dispensary.

“There are a lot of hoops and hurdles to go over,” he said.

One of the first things discovered by Ashamalla, as well as others who have begun the process, is that securing real estate is often easier said than done.

“There are very few landlords that are willing to deal with it and there are very few properties that fall within the non-restricted areas,” Ashamalla said.

Indeed, Proposition 64 — the initiative that passed in November 2016 to legalize adult use of marijuana — stipulates that businesses must operate at least 600 feet away from a school, day care center or youth center, among other guidelines.

Richard Smith, a fellow Lompoc resident who runs the CropLand Health delivery service, is also looking to open a storefront in Lompoc.

Smith said that he’s run into roadblocks with at least one local commercial real estate agent who he said either won’t negotiate with him at all or is holding off on negotiations until after ordinances are adopted by the city and/or county, which could potentially drive up the price of properties.

“Unfortunately, this real estate agent knew that if he waited to lease these properties until after the ordinance passed, he could create bidding wars with all the outsiders that came into town,” Smith said.

“And that’s exactly what’s going on now.”

Ashamalla said he’s experienced that firsthand.

He said he began searching for potential properties last year before the city of Lompoc even began seriously discussing regulations. After negotiating with a broker, he said he reached a deal for a property for $600,000. He ended up declining the offer because it looked like the property would be in a banned zone. The next day, however, it was determined to be in a safe area for sales, so Ashamalla said he went to try to reclaim the deal. He said he was told that the property was already sold — for $750,000.

“A hundred and fifty thousand dollars more in a day,” he said. “So yeah, it’s almost created its own hysteria because the maps have been so restrictive and I think a lot of people weren’t looking at them or understanding them.”

Show me the money

Another aspect of the industry that will continue to cause issues for business owners is the lack of traditional banking.

Because marijuana is still classified as Schedule 1 drug by the federal government, federally insured banks don’t typically offer loans or accounts to businesses within the industry.

CoastHills Credit Union, one of the largest community-based financial institutions on the Central Coast, is among the overwhelming number of banks that follow that policy.

“We are a federally insured Credit Union, and cannabis is not legal at the federal level,” CoastHills Credit Union President/CEO Jeff York said in a statement to Lee Central Coast Newspapers. “In short, although we do commercial lending, cannabis is a non-approved business as per our policies.”

While this has led many within the industry to deal with cash only, others have found ways around it.

Smith, who estimated that his business serves about 2,000 to 3,000 patients within his collective, said he avoids traditional banks in favor of the growing cryptocurrency market, which uses digital assets like bitcoins.

“Anybody in this industry who has a bank account is lying to their bank about what they do,” he said. “I’ve tried the honest approach and went into banks and told them what we do and they won’t give (us) an account. You can open up an account online and try to do it from a personal standpoint, but then certain activities show up, and you’ll lose that account if you show up as a cannabis business. So, we made a decision early on that we weren’t gonna deal with that headache of having once a month to find another bank account. It’s just a disaster.”

Smith said he doesn’t intend to carry around big bags of cash to pay taxes and other fees, like so many other businesses have done or are planning to do in the future.

“We’ve just decided that we’re not gonna use the traditional banking system because it’s not there for us,” he said. “It’s not for the cannabis industry, so we have to be innovative and say, ‘If you don’t want our business, we’ll go somewhere else.’”

While some, such as the federal government, may view certain attempts to diversify cash as money laundering, Smith said he isn’t concerned.

“Anything you do with your cash in this business — let’s say you diversify and open up another business because you’re really successful, well the federal government is gonna say you’re laundering the money no matter what,” he said. “It doesn’t matter if you’re just moving it or trying to protect it.”

Ross, who had his accounts frozen following the raid on his operation in Amador County, acknowledged that he’s used deception in order to maintain accounts at traditional banks.

“I’ve set up multiple bank accounts and business accounts and just not been 100-percent honest about where the money is coming from,” he said. “I would love to be completely honest and do everything by the book, but there’s no banking institution that I’ve spoken to that has been able to provide their banking services to my business or to me.

“We keep cash on hand, because it’s hard to deposit (large amounts of) cash into a bank without drawing any red flags,” he added. “So, multiple bank accounts and different business accounts and keeping a lot of cash on hand is how we’ve been able to get through it.”

Although he admits that his current method can be perilous, he said it’s just as worrisome as his alternatives.

“Believe me, instead of getting cash from dispensaries that we deliver to, I would much rather get a check that could go right to the bank,” he said. “That’s how I’ve done all my other paychecks in my life, and that’s obviously a lot easier than carrying around $5,000 or $10,000 in cash and worrying about keeping track of all that money. In your car doesn’t seem safe; at your home doesn’t seem safe; at your business doesn’t seem safe — especially now, seeing that the police can come and seize that money.

“I would definitely rather use a proper banking system and not have to worry about having so much cash on hand.”

Ashamalla said his business partner has discussed starting a California-chartered private credit union that would be able to work with marijuana businesses.

“So it’s not FDIC, but it is state-backed, so there’s insurance that you can get for it,” he said.

Competing with black market

Another major hurdle for legal cannabis business owners is that, after dealing with licensing fees and taxes, among other costs, they will still have to compete with black market sellers who are able to turn profits much more quickly.

“It’s gonna be so expensive that the black market will thrive because they don’t have to pay taxes,” Smith said. “So, they can have the same baseline prices as us, but they won’t have to pay taxes, so that will be the big challenge for us.”

Ashamalla noted that the challenge will be compounded because the black market sellers also won’t face the same quality testing and quality assurances that the legal market will have to navigate.

“Basically, if we send something to be tested and it’s found to have something (problematic), we have to destroy all the product — literally everything that comes from that crop,” he said. “The black market (sellers), they don’t want to lose their crops, so there’s gonna be a lot of people trying to get their products sold that are not up to code. That scares me because it doesn’t create the best image. … It’s only gonna challenge those of us who want to go legit.”

That dynamic isn’t just troubling for those within the industry, but also for police.

“There are people, whether you make it legal or not, who are gonna continue to produce and sell marijuana illegally because they don’t want to pay taxes or get a business license and that stuff, and if they can undercut the legal market they’re gonna stay in business,” Lompoc Police Chief Pat Walsh said. “So I wonder about the techniques they will have to employ, or that they have employed in the past and will continue to employ, to stay in that illegal business. It’s a cutthroat business in the black market and it will stay that way, so I worry about that, too.”

Worth the effort

Despite all the myriad obstacles, many of those who are looking to enter the legal cannabis market say the work is worth it.

Along with the direct barriers to entry, some current and potential business owners said they feel like they are also facing indirect obstacles from many in their respective communities who would rather not have them around.

Ashamalla said he’s fielded a lot of questions from outsiders who are interested in opening up shop in Lompoc.

“I tell them, basically you have to deal with a town that doesn’t want you here,” he said. “They voted for it, but I think the opposition is more outspoken.”

He said he’s hopeful that will change with more efforts to educate the community.

Ashamalla also once ran a restaurant in Lompoc and noted that some of the city processes were notoriously difficult to deal with. He said he’s seen improvement on that front in the years since, however, and is confident that assistance will be available.

“Hopefully it won’t be as big of a fight as it was before,” he said. “I’m hoping that the city assigns someone who is cannabis-business friendly to help us get through the process and won’t put up the hoops and hurdles, but rather help us get through the hoops and hurdles.”

Smith, who grew up in Lompoc, said he sees his business as a way to improve his hometown’s economy and provide jobs.

“My goal is to give back to my community,” he said. “I’m really focused on creating better paying jobs here in town, not fast food (pay). We want our employees to like our business and care and have a vested interest and see that we care about the community and they can do well here.”

Ross, who is still scouting places to move his operation, said he’s also hopeful for what the future will bring to the industry.

“We are trying to do everything by the book and trying to become a legitimate, legal business,” he said, noting that he had been operating somewhat “in the shadows.”

“It’s not impossible, but it’s near impossible to do that at this time,” he said. “It just sucks that it’s like that. When we were arrested, we had close to a quarter million dollars (worth) of property and products seized from us, and possibly in a year’s time or less than that, that wouldn’t ever happen.”

Ross said he has a longtime agriculture background and is looking forward to putting that passion to use in a legit for-profit business.

“It’s not the most positive system at this point,” he said, “but it definitely is changing, so I’ve got my head up for the future.”

Willis Jacobson covers the city of Lompoc for Lee Central Coast Newspapers. Follow him on Twitter @WJacobsonLR.


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Willis Jacobson covers news and other issues, primarily those that affect the Lompoc Valley and Vandenberg Air Force Base for the Lompoc Record. He is a graduate of The University of Florida's College of Journalism and Communications.

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